A pedestrian walks past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York, U.S., on Monday, May 21, 2012. Facebook Inc., the social networking site that raised $16 billion in an initial public offering, fell below its $38 offer price in its second trading day. Photographer: Scott Eells/Bloomberg

Morgan Stanley on Tuesday defended its handling of Facebook's initial public offering after reports surfaced that the company failed to warn retail investors days before the IPO that earnings estimates were falling short.

"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs," Pen Pendleton, a spokesman for the investment bank, said Tuesday in an e-mailed statement. "These procedures are in compliance with all applicable regulations."

Facebook shares have plunged in the three days since the second-largest IPO in U.S. history, prompting investors to blame Morgan Stanley, the lead underwriter. The bank said it sent a copy of a revised prospectus that Facebook filed May 9 to all of its institutional and retail investors. The filing disclosed that Facebook's advertising growth hasn't kept pace with the increase in users.

"In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information," Pendleton said. "These revised views were taken into account in the pricing of the IPO."

William Galvin, the Massachusetts secretary of state, said his securities division subpoenaed Morgan Stanley over talks between Scott Devitt, the research analyst, and the firm's institutional investors about Facebook's revenue.

The subpoena comes amid several news reports of the days leading up to the IPO. Just days before Facebook went public, some big investors got nervous about the social network. After publicly warning about challenges in mobile advertising, Facebook executives held conference calls to update their banks' analysts on the business. Armed with the new information, analysts at Morgan Stanley and other firms started reaching out to their institutional clients to dial back expectations for the Internet company.

One prospective investor was told that second-quarter revenue could be 5 percent lower than the bank's earlier estimates. Another analyst warned that revenue could be light for the next two years.

As investors tried to digest the developments, Morgan Stanley was busy setting the price and the size of the IPO.

While some big institutions chose not to buy the stock, others placed large orders. And retail investors, who weren't necessarily privy to the same information, continued to clamor for shares.

In the end, Morgan Stanley bankers decided they had enough demand and interest for Facebook to justify an offering price of $38 per share. They didn't.

When Facebook went public on Friday, shares of the social-networking company barely budged - and they have been falling ever since.

Facebook's IPO was supposed to be Morgan Stanley's crowning achievement. The bank had helped usher in a new era of technology companies, leading the offerings of LinkedIn, Groupon, Pandora and more than a dozen other startups over the past year.

Facebook was poised to be the biggest and most ambitious. When the dust settles, Morgan Stanley could make more than $100 million on the IPO.

But Morgan Stanley may have given the market more than it can chew. Rival bankers and big investors have complained that Morgan Stanley botched the IPO, setting the price too high and selling too many shares to the public.

Facebook's fate as a public company is hardly sealed. Many newly public companies stumble out of the gate and later become top performing stocks, including Amazon.com.

"If true, the allegations are a matter of regulatory concern to Finra" and the Securities and Exchange Commission, Richard Ketchum, the chief executive of the regulatory authority, said in a statement.

The authority's chief didn't say whether his agency is investigating Morgan Stanley. John Nester, a spokesman for the SEC, declined to comment.

Research employees may communicate with investors if they don't do it jointly with investment-banking employees or managers of the firm that's going public, according to the terms of the 2003 Wall Street research settlement. Companies paid $1.4 billion to settle regulators' allegations that they published misleading research to win investment-banking business.

The Jumpstart Our Business Startups Act, which became law last month, further relaxed restrictions on analysts who work for investment banks underwriting an IPO, said Jay Ritter, a professor of finance at the University of Florida.

"Under the Jobs Act, affiliated analysts are able to jump in and talk to institutional investors," Ritter said.